Termination dispute outcome holds wider warning for construction sector

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A lender has won a contract termination dispute with a now defaulted and discontinued airline. Even though the court found that the lender had already waived their right to terminate the contract for payment defaults.

Following another important decision in Struthers v Davies (See: Brunel News – June 2022) where an employer failed to terminate a construction contract after default notices were incorrectly served, these cases highlight the importance of correct procedures in the termination of a contact.

European Skyjets borrowed just under US$9 million from Lombard North Central to buy a new aircraft. The company were regularly late in repaying loans and Lombard tried to apply late payment charges even though the contract had no such late charge fees within its terms. In 2012 the lender offered Skyjets more time to bring the arrears up to date.

In November 2012, Lombard learned that Skyjets had in fact become insolvent. Subsequently, it terminated the loan agreement on the grounds of payment default, later seizing and selling the aircraft for just over US$3 million.

Lombard started a claim against the airline, where a balance of nearly US$6 million was left outstanding. Skyjets defended the action, stating that the lender had waived its right to terminate the contact for payment defaults as it had offered the airline more time to pay instead of enforcing the termination procedure.

Despite the lender having using language to try and protect its no-waiver rights, the courts agreed with Skyjets argument. Contrary to this initial finding however, the court provided its final ruling in favour of the lender – finding that nevertheless Lombard had correctly followed procedure when terminating the contract.

Lombard had honestly believed there had been a “material adverse change” in relation to Skyjet’s financial position, and because of the actual termination clause in the loan agreement, there was no requirement for the basis of termination to be specified. Skyjets’ weakened financial position amounted to an event of default consistent with the contract’s requirements.

Harry Bush, Senior Risk Executive – Claims & Technical, Brunel Professions says: “This decision, as well as the decision in Struthers v Davies, highlights the importance of understanding, negotiating on and following the procedures set out in the “administrative” clauses. Administrative clauses are the battlefield on which a contract dispute is fought, and failure to follow these rules would be akin to Marshall Ney charging the British squares at Waterloo; a failure which may put an entire claim in jeopardy.”

Reports about the case have been published by Stephenson Harwood, Herbert Smith Freehills and Mayer Brown.

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